Dive Brief:
- Supply constraints hampered the sales and profits of Nestlé’s vitamin, mineral and supplement business in 2023, executives said last week.
- Real internal growth at Nestlé Health Science fell by 3.2% in the second half of 2023 because of the supply shortfalls, CFO and EVP François-Xavier Roger said on the company’s earnings call. The unit’s underlying trading operating profit margin fell by 1.6 percentage points.
- The supply issues trace back to IT hiccups in the implementation of what Roger described as “highly automated systems” at its U.S. packaging sites last year. “We are mobilizing the group’s full resources and the supply constraints are expected to be fully resolved by the end of the first half of 2024,” the finance chief added.
Dive Insight:
While Nestlé has been wrestling with the supply constraints in its vitamin and supplement business since last year, the recovery “is taking longer than expected as the extent of the issue was deeper and more complex than we initially thought,” Roger said.
The integration mishap “truly surfaced as a surprise,” CEO Mark Schneider said in October, after it became clear it would have an impact on the company’s supply chain.
“There was nothing technologically overly complex here,” Schneider said then. “We were overwhelmed by a large number of different systems that had we brought together and also a large number of SKUs that are basically the nature of the vitamins minerals and supplements business.”
On last week’s call, Schneider elaborated more, noting that Nestlé has bought several companies in the vitamin and supplement space from private equity owners in recent years with the aim of bringing to them scale.
The integration was meant to replace “what we perceive to be very outdated systems,” he said. “What happened here is we, in hindsight, left it in the hands of a decentralized team that is not part of the mainstream Nestlé IT team [and] that did not fully envisage the complexity of this.”
Explaining the impact on the company’s supply chain to analysts, Schneider said in October: “When you are missing production from several weeks, then clearly your supply chain from that time, given that demand has come on quite strong again, is empty. And so you need to refill.”
After supply constraints left sales on the table, Nestlé now has to set about winning back shelf space at retailers for the unit’s products, the chief noted on last week’s call.
That wasn’t Nestlé’s only supply headache in the quarter. Capacity constraints at its Perrier brand were also a drag on the company’s mineral water business.
Additionally, Nestlé highlighted that following a transformation plan in France, it was reviewing operating practices in its natural mineral water business in several countries.
“With food safety as a primary goal, practices at some of its production sites may not be in line with the applicable regulatory framework,” the company said, adding that “its water products have always been, and remain, safe to drink.”
